Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence

by: Robert E Hall

The Journal of Political Economy, Vol. 86, No. 6. (1978), pp. 971-987.

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Abstract

Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle--permanent income hypothesis.

@article{hall-78, abstract = {Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle--permanent income hypothesis.}, author = {Hall, Robert E. }, citeulike-article-id = {598931}, journal = {The Journal of Political Economy}, keywords = {macro\_tartu}, number = {6}, pages = {971--987}, posted-at = {2006-04-24 22:56:50}, priority = {2}, title = {Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence}, url = {http://www.jstor.org/stable/1840393}, volume = {86}, year = {1978} }

RIS record

TY - JOUR ID - hall-78 L3 - citeulike-article-id:598931 TI - Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence JF - The Journal of Political Economy VL - 86 IS - 6 SP - 971 EP - 987 N2 - Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle--permanent income hypothesis. KW - macro_tartu AU - Hall, Robert PY - 1978/// UR - http://www.jstor.org/stable/1840393 ER -

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